Algorithm versus Small Businesses: an unequal battle
Updated: May 30
In 1994, a prominent magazine ran a cover article on why the internet would never go mainstream as it was not designed for commerce. Back then, there was a strict prohibition on commercial enterprises on the internet.
The first and second wave
1995 was a watershed year for e-commerce. That year the US National Science Foundation, which controlled the backbone infrastructure of the internet, lifted the ban on profit-making ventures on the internet. The same year, both Amazon and eBay were born. By 1999, e-com sales were already crossing $150 billion mark. Today it stands at about $3.5 trillion.
This was the first wave of e-commerce – it established itself as a rising star.
The second wave starting in the beginning of this decade, with faster internet and cheaper smartphones, the way consumers brought goods and services completely changed. It also enabled collecting data on how a user responds to the visual of a product, location, reaction to discounts and other data points enabling targeted product positioning.
Small Businesses at Risk
The introduction of e-commerce was initially welcomed by all the small and medium-sized businesses. It provided the platform to reach millions of customers and compete with the biggest brands.
For consumers, this meant having a multitude of choices. More customers and bigger discounts, it was an improbable utopia for all.
Amazon alone has enabled over 2 million individuals, small and medium-sized companies to sell their goods on its marketplace spanning over 130 countries. 20,000 of those businesses made the sales of over $1 million last year, each in-turn paying significant commissions to Amazon. This way, both the merchant and the marketplaces grew simultaneously.
This story is similar for any large-scale aggregator, whether for taxis, hotels or food delivery sites. Ostensibly, they are all adding value at both ends and making revenues for themselves.
But now we are at the new third wave of e-commerce when the boundaries are shifting.
The same small vendors are often finding themselves out of the dream world as the e-commerce marketplace has now shifted into becoming their competitor as a manufacturer.
The third wave
In 2009, Amazon quietly entered its own marketplace as a manufacturer offering few electronic items under a private label called AmazonBasics. These goods, in particular, the batteries were priced about 30 percent lower than the existing brands. Consequently, AmazonBasics acquired roughly one-third of the online market share beating both Energizer and Duracell.
The question arose – If with little effort, Amazon can outsell the leading brands, what else a company can do?
Amazon now has 140 private label brands on its online marketplace. Only a few of these private brands have Amazon in their name – AmazonBasics, Amazon Essentials (men’s and women’s clothing) while a majority of them operate under unrecognizable names such as Wag (dog food), Rivet (home furnishings) and Pinzon (bedding and towels).
The issue has become a political point for the 2020 US Presidential Election with the Democrat frontrunner candidate, Elizabeth Warren advocating to “break up Amazon” as it is presenting an unfair competition to small vendors.
Amazon is not the only e-commerce platform which has its own private label brands. Walmart’sFlipkart entered into this market in 2017 with Smart Buy (consumer electronics) and MarQ (large appliances) and has been capturing the market.
Algorithm to Control the Traffic
Studies suggest that customer’s behavior has now been shifted to a need-based decision rather than a brand-driven decision. 70 percent of the word searches are done on Amazon are for general goods. This means consumers are searching “shoes” or “chocolate” instead of typing Nike or Cadbury.
And this is where these marketplaces have an advantage. They are optimizing their private labels in search of discovery to beat their competitors. Customers shopping on any of these platforms often tend to buy the product with high consumer ratings which appear first.
E-commerce giants are using data that is generated by every search of consumer and then feeding that data into algorithms which optimize the products which appear to users and are ultimately putting at a disadvantage, not only the small and medium business but even the premium brands.
This is not just an e-retail concept.
Case of Taxi Aggregators
With millions of rides every day, taxi aggregators have changed the urban transportation scenario. These aggregators themselves do not own a cab and just organize different cab drivers-owners as their “partners”.
A cab is a major capital investment which the aggregators wanted to avoid in the early days. Instead, the aggregators invested in showering unsustainable incentives onto driver-owners to increase their network. More cabs on a platform meant more customers.
With time, incentives started to flatten out and the partner drivers who joined with a car on a hefty bank loan were left with little choice. And with investments flowing in, the third wave hit them as well.
Aggregators started to become service providers
In 2015, the online taxi aggregator, Ola, announced that it is investing Rs 5,000 crore to buy and then lease cars to the drivers taking a sharp turn from its original model. The drivers are asked to make a down-payment of Rs 25,000 to Rs 35,000 and pay a monthly subscription fee along with a fixed commission and sign a lock-in contract for four years.
This leasing program addressed two major problems. First, it enabled the company to hold the drivers for at least four years on their platform. Secondly, it reduced the expense as the company doesn’t have to pay the lease model drivers any additional incentives which it normally does to its partner drivers.
And then comes the hidden hand – the algorithm.
Algorithms at Work
By 2018, these cab aggregators owned about 40 percent of the total fleet. Many of the self-owned or partner drivers complained of bias against them in a business allotment.
In a strict business logic, it is in the interest of the aggregator that the driver working on a company leased car gets priority in ride allotment compared to partner driver. And since this whole process is controlled by an algorithm which is a closely guarded secret, the lack of transparency does not do any good to such fears.
Where are we heading to?
The third wave follows the classic adage – Privatization of profits and socialization of all losses.
Large companies test the product at the expense of small manufacturers. When the product starts to do well, these marketplace giants can scoop the cream by becoming the manufacturer.
Need for intervention
India is teeming with small vendors and is a large market and the issue needs attention. It begins with stopping the marketplace from becoming the manufacturing. E-markets need to be neutral and for that, they cannot push their own chain of products and if they still want to do so, then it has to be as a separate entity.
Secondly, there is a need for transparency of how data is collected, analyzed and used – the algorithm can no longer remain in darkness.
As published in Economic Times on November 15, 2019.